UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2021

 

or

 

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________________to_____________

 

Commission File No. 001-39338

 

NUZEE, INC.

(exact name of registrant as specified in its charter)

 

Nevada   38-3849791
(State or other jurisdiction of incorporation or organization)   (I.R.S. Employer Identification Number)

 

1 401 Capital Avenue, Suite B, Plano, TX, 75074

(Address of principal executive offices) (zip code)

 

(760) 295-2408

(Registrant’s telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class   Trading symbol(s)   Name of each exchange on which registered
Common Stock, $0.00001 par value   NUZE   The NASDAQ Stock Market LLC

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [  ]

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes [X] No [  ]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

  Large accelerated filer [  ] Accelerated Filer [  ]
  Non-accelerated filer [X] Smaller reporting company [X]
  Emerging growth company [  ]    

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [  ]

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [  ] No [X]

 

As of May 12, 2021, the registrant had 17,820,390 shares of common stock outstanding.

 

 

 

     

 

 

Table of Contents

 

  Page
PART I  
   
Item 1. Financial Statements 4
Consolidated Balance Sheets (unaudited) 4
Consolidated Statements of Operations (unaudited) 5
Consolidated Statements of Comprehensive Income (Loss) (unaudited) 6
Consolidated Statements of Stockholders’ Equity (unaudited) 7
Consolidated Statements of Cash Flows (unaudited) 8
Notes to Consolidated Financial Statements (unaudited) 9
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 17
Item 3. Quantitative and Qualitative Disclosures About Market Risk 21
Item 4. Controls and Procedures 21
   
PART II 22
   
Item 1. Legal Proceedings 22
Item 1A. Risk Factors 22
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 23
Item 6. Exhibits 23
   
SIGNATURES 24

 

  2  

 

 

SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS

 

This report includes “forward looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), Such forward-looking statements reflect the views of NuZee, Inc. (“NuZee” or the “Company”) with respect to future events and financial performance. These forward-looking statements are subject to certain uncertainties and other factors that could cause actual results to differ materially from such statements. From time to time, our management or persons acting on our behalf may make forward-looking statements to inform existing and potential security holders about the Company. All statements other than statements of historical facts included in this report regarding our financial position, business strategy, plans and objectives of management for future operations, industry conditions, and indebtedness covenant compliance, or any other matters, are forward-looking statements. When used in this report, forward-looking statements are generally accompanied by terms or phrases such as “estimate,” “expects”, “project,” “predict,” “believe,” “expect,” “anticipate,” “target,” “plan,” “intend,” “seek,” “goal,” “will,” “should,” “may” or other words and similar expressions that convey the uncertainty of future events or outcomes. Items contemplating or making assumptions about, actual or potential future sales, market size, collaborations, and trends or operating results also constitute such forward-looking statements. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.

 

Forward-looking statements in this report may include, without limitation, statements regarding:

 

  ●

our plans to obtain funding for our operations, including funding necessary to develop, manufacture and

commercialize our products;

     
  ● the impact to our business from the COVID-19 global crisis;
     
  ● the evolving coffee preferences of North American coffee consumers;
     
  ● the size and growth of the markets for our products and services;
     
  ●

our commercialization, marketing and manufacturing capabilities and strategy, including our business plans

pertaining to CBD-blended coffee products;

     
  ● our ability to compete with companies producing similar beverage products;
     
  ●

our expectation that our existing capital resources will be sufficient to fund our operations for our operations

for at least the next 12 months;

     
  ● regulatory developments in the U.S. and in non-U.S. countries;
     
  ● our ability to retain key management personnel;
     
  ●

the scope of protection we are able to establish and maintain for intellectual property rights covering our

products and technology;

     
  ●

the accuracy of our estimates regarding expenses, future revenue, capital requirements and needs for

additional financing;

     
  ●

our ability to develop and maintain our corporate infrastructure, including our internal control over

financial reporting;

     
  ● our ability to develop innovative new products; and
     
  ● our financial performance.

 

 

The forward-looking statements are not meant to predict or guarantee actual results, performance, events or circumstances and may not be realized because they are based upon our current projections, plans, objectives, beliefs, expectations, estimates and assumptions and are subject to a number of risks and uncertainties and other influences, many of which we have no control over. Actual results and the timing of certain events and circumstances may differ materially from those described by the forward-looking statements as a result of these risks and uncertainties. Forward-looking statements speak only as of the date they are made. You should consider carefully the statements in the section of our Annual Report on Form 10-K filed with the SEC on December 28, 2020 titled “Risk Factors” and sections of this report that describe factors that could cause our actual results to differ from those set forth in the forward-looking statements.

 

Readers are urged not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. We assume no obligation to update any forward-looking statements in order to reflect any event or circumstance that may arise after the date of this report, other than as may be required by applicable law or regulation. Readers are urged to carefully review and consider the various disclosures made by us in our reports filed with the Securities and Exchange Commission which attempt to advise interested parties of the risks and factors that may affect our business, financial condition, results of operation and cash flows. If one or more of these risks or uncertainties materialize, or if the underlying assumptions prove incorrect, our actual results may vary materially from those expected or projected.

 

  3  

 

 

Item 1. Financial Statements.

 

NuZee, Inc.

CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

 

    March 31, 2021     September 30, 2020  
ASSETS                
Current assets:                
Cash   $ 15,035,026     $ 4,398,545  
Accounts receivable, net     261,132       195,610  
Inventories, net     241,291       245,370  
Prepaid expenses and other current assets     130,185       645,375  
Total current assets     15,667,634       5,484,900  
                 
Property and equipment, net     881,975       1,668,348  
                 
Other assets:                
Right-of-use asset - operating lease     521,983       652,197  
Right-of-use asset - finance lease     -       105,825  
Investments     179,339       183,314  
Other assets     81,926       80,559  
Total other assets     783,248       1,021,895  
                 
Total assets   $ 17,332,857     $ 8,175,143  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY                
Current liabilities:                
Accounts payable   $ 42,249     $ 49,778  
Current portion of long-term loan payable     57,815       56,072  
Current portion of lease liability - operating lease     227,979       263,678  
Current portion of lease liability - finance lease     26,123       21,598  
Accrued expenses     699,575       703,069  
Deferred income     47,516       34,000  
Other current liabilities     321,687       104,525  
Total current liabilities     1,422,944       1,232,720  
                 
Non-current liabilities:                
Lease liability - operating lease, net of current portion     303,601       395,713  
Lease liability - finance lease, net of current portion     63,418       78,400  
Loan payable - long term, net of current portion     29,131       56,845  
Other noncurrent liabilities     22,437       21,707  
      418,587       552,665  
                 
Total liabilities     1,841,531       1,785,385  
                 
                 
Stockholders’ equity:                
Common stock; 100,000,000 shares authorized, $0.00001 par value; 17,820,390 and 14,570,105 shares issued     178       146  
Additional paid in capital     61,549,965       40,472,229  
Accumulated deficit     (46,254,458 )     (34,272,778 )
Accumulated other comprehensive income     195,641       190,161  
Total stockholders’ equity     15,491,326       6,389,758  
                 
Total liabilities and stockholders’ equity   $ 17,332,857     $ 8,175,143  

 

The accompanying notes are an integral part of these unaudited consolidated financial statements

 

  4  

 

 

NuZee, Inc.

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

 

   

Three Months Ended

March 31 ,2021

   

Three Months Ended

March 31 ,2020

   

Six Months Ended

March 31 ,2021

   

Six Months Ended

March 31 ,2020

 
Revenues   $ 414,064     $ 393,392     $ 932,051     $ 939,600  
Cost of sales     423,113       496,692       939,397       919,865  
Gross Profit (Loss)     (9,049 )     (103,300 )     (7,346 )     19,735  
                                 
Operating expenses     6,111,759       2,413,632       12,015,585       5,963,465  
Loss from operations     (6,120,808 )     (2,516,932 )     (12,022,931 )     (5,943,730 )
                                 
Loss from investment in unconsolidated affiliate     (1,919 )     -       (3,975 )     -  
Other income     41,093       1,134       53,714       2,981  
Other expense     (244 )     (15 )     (813 )     (2,599 )
Interest expense     (3,730 )     (5,407 )     (7,675 )     (10,125 )
Net loss     (6,085,608 )     (2,521,220 )     (11,981,680 )     (5,953,473 )
Net income (loss) attributable to noncontrolling interest     -       (30,969 )     -       (41,990 )
Net loss attributable to NuZee, Inc.   $ (6,085,608 )   $ (2,490,251 )   $ (11,981,680 )   $ (5,911,483 )
                                 
Basic and diluted loss per common share   $ (0.40 )   $ (0.18 )   $ (0.80 )   $ (0.43 )
                                 
Basic and diluted weighted average number of common stock outstanding     15,260,986       13,729,104       14,998,201       13,714,223  

 

The accompanying notes are an integral part of these unaudited consolidated financial statements

 

  5  

 

 

NuZee, Inc.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(UNAUDITED)

 

For the three months eneded   NuZee, Inc.    

Noncontrolling 

Interests

    Total  
March 31   2021     2020     2021     2020     2021     2020  
Net loss   $ (6,085,608 )   $ (2,490,251 )   $      -     $ (30,969 )   $ (6,085,608 )   $ (2,521,220 )
                                                 
Foreign currency translation     3,824       (96,949 )     -       75,196       3,824       (21,753 )
Total other comprehensive income (loss), net of tax     3,824       (96,949 )     -       75,196       3,824       (21,753 )
Comprehensive income (loss)   $ (6,081,784 )   $ (2,587,200 )   $ -     $ 44,227     $ (6,081,784 )   $ (2,542,973 )

 

For the six months eneded   NuZee, Inc.    

Noncontrolling

Interests

    Total  
March 31   2021     2020     2021     2020     2021     2020  
Net loss   $ (11,981,680 )   $ (5,911,483 )   $            -     $ (41,990 )   $ (11,981,680 )   $ (5,953,473 )
                                                 
Foreign currency translation     5,480       (69,719 )     -       80,838       5,480       11,119  
Total other comprehensive income (loss), net of tax     5,480       (69,719 )     -       80,838       5,480       11,119  
Comprehensive income (loss)   $ (11,976,200 )   $ (5,981,202 )   $ -     $ 38,848     $ (11,976,200 )   $ (5,942,354 )

 

The accompanying notes are an integral part of these unaudited consolidated financial statements

 

  6  

 

 

NuZee , Inc.

Consolidated Statements of Stockholders’ Equity

(unaudited)

 

                            Accumulated        
                Additional           other        
    Common stock     paid-in     Accumulated     comprehensive        
    Shares     Amount     capital     deficit     income     Total  
                                     
Balance September 30, 2020     14,570,105     $ 146     $ 40,472,229     $ (34,272,778 )   $ 190,161     $ 6,389,758  
                                                 
Equity securities issued for cash     324,959       3       2,683,977       -       -       2,683,980  
Stock option expense     -       -       4,507,298       -       -       4,507,298  
Exercise of stock options     6,000       -       9,180       -       -       9,180  
Other comprehensive gain     -       -       -       -       1,656       1,656  
Net loss     -       -       -       (5,896,072 )     -       (5,896,072 )
                                                 
Balance December 31, 2020     14,901,064     $ 149     $ 47,672,684     $ (40,168,850 )   $ 191,817     $ 7,695,800  
                                                 
Equity securities issued for cash     2,782,111       28       11,017,276       -       -       11,017,304  
Common stock issued for compensation     137,215       1       870,999       -       -       871,000  
Stock option expense     -       -       1,989,006       -       -       1,989,006  
Other comprehensive gain     -       -       -       -       3,824       3,824  
Net loss     -       -       -       (6,085,608 )     -       (6,085,608 )
                                                 
Balance March 31, 2021     17,820,390     $ 178     $ 61,549,965     $ (46,254,458 )   $ 195,641     $ 15,491,326  

 

NuZee , Inc.

Consolidated Statements of Stockholders’ Equity

(unaudited)

 

                                  Accumulated        
                Additional                 other        
    Common stock     paid-in     Accumulated     Noncontrolling     comprehensive        
    Shares     Amount     capital     deficit     interest     income (loss)     Total  
                                           
Balance September 30, 2019     13,617,366     $ 137     $ 28,898,344     $ (24,795,687 )   $ 102,903     $ (90,635 )   $ 4,115,062  
                                                         
Equity securities issued for cash     111,738       1       1,994,522       -       -       -       1,994,523  
Stock option expense     -       -       2,220,861       -       -       -       2,220,861  
Other comprehensive gain     -       -       -       -       5,642       27,230       32,872  
Net loss     -       -       -       (3,421,232 )     (11,021 )     -       (3,432,253 )
                                                         
Balance December 31, 2019     13,729,104     $ 138     $ 33,113,727     $ (28,216,919 )   $ 97,524     $ (63,405 )   $ 4,931,065  
                                                         
Stock option expense     -       -       962,490       -       -       -       962,490  
Other comprehensive gain / (loss)     -       -       -       -       75,196       (96,949 )     (21,753 )
Net loss     -       -       -       (2,490,251 )     (30,969 )     -       (2,521,220 )
                                                         
Balance March 31, 2020     13,729,104     $ 138     $ 34,076,217     $ (30,707,170 )   $ 141,751     $ (160,354 )   $ 3,350,582  

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

  7  

 

 

NuZee, Inc.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

    Six Months Ended March 31, 2021    

Six Months Ended

March 31, 2020

 
             
Operating activities:                
Net loss   $ (11,981,680 )   $ (5,953,473 )
Adjustments to reconcile net loss to net cash                
used by operating activities:                
Depreciation and Amortization     161,911       209,386  
Noncash lease expense     142,664       55,189  
Stock option expense     6,496,304       3,183,351  
Property and equipment impairment     840,391       -  
Common stock issued for compensation     871,000       -  
Sales allowance     (2,003 )     -  
Write-off of deferred offering costs     477,605       -  
Loss from investment in unconsolidated affiliate     3,975       -  
Change in operating assets and liabilities:                
Accounts receivable     (63,519 )     211,383  
Accounts receivable - Related party     -       (130 )
Inventories     4,079       203,428  
Prepaid expense and other current assets     50,448       (32,094 )
Other current assets - Related party     -       460  
Other asset     (1,367 )     (24,552 )
Accounts payable     (7,529 )     (141,891 )
Deferred income     13,516       -  
Other non-current liabilities     730       6,999  
Operating lease liabilities     (127,811 )     (45,210 )
Other current liabilities     217,162       -  
Finance lease liabilities     -       (9,209 )
Other current liabilities - related party     -       (744 )
Accrued expense and other current liabilities     (16,357 )     101,355  
                 
Net cash used in operating activities     (2,920,481 )     (2,235,752 )
                 
Investing activities:                
Cash paid for deferred offering cost     -       (403,554 )
Cash paid for purchase of fixed assets, net     (122,554 )     (16,306 )
Net cash used in investing activities     (122,554 )     (419,860 )
                 
Financing activities:                
Proceeds from exercise of options     9,180       -  
Repayment of loans     (25,971 )     (52,453 )
Repayment of finance lease     (10,457 )     -  
Stock issuance costs     (669,433 )     -  
Proceeds from issuance of equity securities     14,370,717       1,994,523  
Net cash provided by financing activities     13,674,036       1,942,070  
                 
Effect of foreign exchange on cash and cash equivalents     5,480       11,119  
                 
Net change in cash     10,636,481       (702,423 )
                 
Cash, beginning of period     4,398,545       1,326,040  
Cash, end of period   $ 15,035,026     $ 623,617  
                 
Supplemental disclosure of cash flow information:                
Cash paid for interest   $ 7,792     $ 1,774  
Cash paid for taxes   $ 1,050     $ 800  
                 
Non-cash transactions                
Recognition of right-of-use asset and lease liability upon adoption of ASU 2016-02   $ -     $ 517,263  
Finance lease of equipment to pay off accounts payable   $ -     $ 124,540  
Recognition of right-of-use asset and lease liability during the period   $ -     $ 115,603  

 

The accompanying notes are an integral part of these unaudited consolidated financial statements

 

  8  

 

 

NuZee, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited) March 31, 2021

 

1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

The accompanying unaudited interim consolidated financial statements of NuZee, Inc. (together with its subsidiaries, referred to herein as the “Company”, “we” or “NuZee”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”), and rules of the Securities and Exchange Commission (the “SEC”), and should be read in conjunction with the audited consolidated financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the year ended September 30, 2020 as filed with the SEC on December 28, 2020. In the opinion of management, all adjustments, consisting of recurring adjustments, necessary for a fair presentation of financial position and the results of operations for the interim periods presented have been reflected herein. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year. Notes to the financial statements which would substantially duplicate the disclosure contained in the audited financial statements as reported in the annual report on Form 10-K have been omitted.

 

Principles of Consolidation

 

The Company prepares its financial statements on the accrual basis of accounting. The accompanying consolidated financial statements include the accounts of the Company, its wholly owned subsidiaries and its former majority owned subsidiary (which was sold as of September 28, 2020, as described below), which has a fiscal year end of September 30. All significant intercompany accounts, balances and transactions have been eliminated upon consolidation.

 

On September 28, 2020, the Company entered into a Stock Transfer Agreement with Eguchi Holdings Co., Ltd. (“EHCL”), pursuant to which the Company sold to EHCL for an aggregate sale price of approximately $34,000 all of its equity interests in its former majority-owned subsidiary, NuZee JAPAN Co., Ltd. (“NuZee JP”), representing 70% of the outstanding equity interests of NuZee JP.

 

The Company has two wholly owned international subsidiaries in NuZee KOREA Ltd. (“NuZee KR”) and NuZee Investment Co., Ltd. (“NuZee INV”).

 

Stock Split

 

On October 28, 2019, we completed a l-for-3 reverse stock split, which became effective on November 12, 2019. All share and per share information included in these financial statements and notes thereto give effect to the reverse stock split.

 

Earnings per Share

 

Basic earnings per common share is equal to net earnings or loss divided by the weighted average of shares outstanding during the reporting period. Diluted earnings per share reflects the potential dilution that could occur if stock options, warrants and other commitments to issue common stock were exercised or equity awards vest resulting in the issuance of common stock that could share in the earnings of the Company. As of March 31, 2021 and March 31, 2020, the total number of common stock equivalents was 7,435,702 and 1,705,000, respectively, comprised of stock options and warrants as of March 31, 2021 and entirely of stock options as of March 31, 2020. The Company incurred a net loss for the three and six months ended March 31, 2021 and 2020, respectively, and therefore basic and diluted earnings per share for those periods are the same because all potential common equivalent shares would be antidilutive.

 

Capital Resources

 

Since its inception, the Company has devoted substantially all of its efforts to business planning, research and development, recruiting management and technical staff, acquiring operating assets and raising capital. The Company has generated limited revenues from its principal operations, and there is no assurance of future revenues.

 

As of March 31, 2021, the Company had cash of $15,035,026. However, the Company has not attained profitable operations since inception.

 

Major Customers

 

In the six months ended March 31, 2021 and 2020, revenue was primarily derived from major customers disclosed below.

Six months ended March 31, 2021:

 

C ustomer Name   Sales Amount     % of Total Revenue Accounts     Receivable Amount     % of Total Accounts Receivable  
Customer WP   $ 261,799       28 %   $ 111,975       43 %

 

  9  

 

 

Six months ended March 31, 2020:

 

C ustomer Name   Sales Amount     % of Total Revenue Accounts     Receivable Amount     % of Total Accounts Receivable  
Customer K   $ 284,099       30 %   $ 206,905       63 %
Customer WP   $ 247,520       26 %   $ 115,471       35 %
Customer J   $ 151,925       16 %   $ 21,302       6 %

 

Lease

 

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), to provide guidance on recognizing lease assets and lease liabilities on the consolidated balance sheet and disclosing key information about leasing arrangements, specifically differentiating between different types of leases. The Company implemented ASU No. 2016-02 on October 1, 2019.

 

The Company does a quarterly analysis of leases to determine if there are any operating leases that require recognition under ASC 842. The Company has one significant long-term operating lease for office and manufacturing space in Plano, Texas. The leased property in Plano, Texas, has a remaining lease term through June of 2024. The lease has an option to extend beyond the stated termination date, but exercise of this option is not probable. The Company did not apply the recognition requirements of ASC 842 to operating leases with a remaining lease term of 12 months or less.

 

The impact of ASU No. 2016-02 (“Leases (Topic 842)” on our consolidated balance sheet beginning October 1, 2020, through the recognition of right-of-use (“ROU”) assets and lease liabilities for operating leases are as follows:

 


    October 1, 2020  
ROU Asset   $ 652,197  
Lease Liability   $ 659,391  

 

During the prior year analysis of leases, we determined to renew the office and manufacturing space in Vista, CA through January 31, 2022, which was previously scheduled to be vacated at June 30, 2020. Additionally, the Korean office and manufacturing space lease was extended through June 2022 and an apartment lease was signed through June 2022. Accordingly, we have added ROU assets and lease liabilities related to those leases at June 30, 2020.

 

The direct-leased property in Vista, California has a remaining lease term through January of 2022. The leased properties in both Korea and Vista, California have options to extend beyond the stated termination date, but exercise of these options are not probable. The sub-leased property in Vista, California, is leased month-to-month and has been calculated as a ROU Asset co-terminus with the direct-leased property.

 

In September 2020, we entered into an 18-month sublease effective October 1, 2020 reducing our space and term in Plano, Texas. Accordingly, this lease has been added to our right-of-use asset balance at September 30, 2020. This lease is for the Company’s principal executive office located at 1401 Capital Avenue, Suite B, Plano, Texas 75074.

 

Effective September 1, 2020, we converted our month-to-month sublease in Vista, California to a 17-month sublease ending January 31, 2022 which is co-terminus with our direct lease in Vista. The month-to-month sublease was recognized as a right-of-use asset in our June 30, 2020 analysis. The terms of the 17-month lease are similar to the terms used to value the right-of-use asset at June 30, 2020.

 

  10  

 

 

As of March 31, 2021, our operating leases had a weighted average remaining lease term of 2.1 years and a weighted-average discount rate of 5%. Other information related to our operating leases is as follows:

 

ROU Asset – October 1, 2020   $ 652,197  
Amortization during the period     (130,214 )
ROU Asset –March 31, 2021   $ 521,983  
         
Lease Liability – October 1, 2020   $ 659,391  
Amortization during the period     (127,811 )
Lease Liability – March 31, 2021   $ 531,580  

 

Lease Liability – Short-Term   $ 227,979  
Lease Liability – Long-Term     303,601  
Lease Liability – Total   $ 531,580  

 

The table below reconciles the fixed component of the undiscounted cash flows for each of the first five years and the total remaining years to the lease liabilities recorded on the Consolidated Balance Sheet as of March 31, 2021:

 

Amounts due within 12 months of March 31,

 

2022   $ 255,678  
2023     151,812  
2024     128,928  
2025     32,468  
2026     -  
Total Minimum Lease Payments     568,886  
Less Effect of Discounting     (37,306 )
Present Value of Future Minimum Lease Payments     531,580  
Less Current Portion of Operating Lease Obligations     (227,979 )
Long-Term Operating Lease Obligations   $ 303,601  

 

On October 9, 2019, the Company entered into a lease agreement with Alliance Funding Group which provided for a sale lease back on certain packing equipment. The terms of this agreement require us to pay $2,987 per month for the next 60 months. As part of this agreement, Alliance Funding Group provided our equipment supplier with $124,540 for the purchase of this equipment. This transaction was accounted for as a financing lease. As of March 31, 2021, our financing lease had a remaining lease term of 3.25 years and a discount rate of 12.75%. The interest expense on finance lease liabilities for the six months ended March 31, 2021 was $6,100.

 

The following summarizes ROU assets under finance leases at March 31, 2021:

 

ROU asset-finance lease at September 30, 2020   $ 105,825  
Impairment     (105,825 )
ROU asset-finance lease at March 31, 2021   $ -  

 

The table below summarizes future minimum finance lease payments at March 31, 2021 for the 12 months ended March 31:

 

2022   $ 33,113  
2023     33,113  
2024     33,113  
2025     11,038  
2026     -  
Total Minimum Lease Payments     110,377  
Amount representing interest     (20,836 )
Present Value of Minimum Lease Payments     89,541  
Current Portion of Finance Lease Obligations     (26,123 )
Finance Lease Obligations, Less Current Portion   $ 63,418  

 

The Company leases office space with terms ranging from month to month to 61 months. Rent expense included in general and administrative expense for the six months ended March 31, 2021 and 2020 was $168,050 and $168,620, respectively.

 

Cash and non cash activities associated with the leases for the six months ended March 31, 2021 are as follows:

 

Operating cash outflows from operating leases:   $ 143,234  
Operating cash outflows from finance lease:   $ 6,100  
Financing cash outflows from finance lease:   $ 10,457  

 

In September 2020, we subleased the space at 1700 Capital Avenue in Plano, Texas, effective October 1, 2020 under favorable terms that are co-terminus with the original lease ending June 30, 2024. In the six months ended March 31, 2021, we received revenue of $53,647 pursuant to the sublease, which is included in Other income on our consolidated statement of operations. Future minimum lease payments to be received under that sublease as of March 31, 2021, for the 12 months ended March 31:

 

2022   $ 121,492  
2023     125,104  
2024     128,881  
2025     32,459  
2026     —  
Total     407,936  

 

  11  

 

 

Loans

 

On April 1, 2019, NuZee purchased a delivery van from Ford Motor Credit for $41,627. The Company paid $3,500 as a down payment and financed $38,127 for 60 months at a rate of 2.9%. The loan is secured by the van. The outstanding balance on the loan at March 31, 2021 and September 30, 2020, amounted to $24,192 and $27,916, respectively.

 

On February 15, 2019 NuZee KR entered into equipment financing for production equipment with ShinHan Bank for $60,563. On June 28, 2019 NuZee KR purchased additional equipment and increased the loan with ShinHan Bank by $86,518. The loan is secured by our production equipment at NuZee KR. The financing bears a term of 36 months at a rate of 4.33% per annum. Principal payments began in July of 2019. The outstanding balance on this loan at March 31, 2021 and September 30, 2020, amounted to $62,754 and $85,001, respectively.

 

The loan payments required for the next five remaining fiscal years are as follows:

 

    Ford Motor Credit     ShinHan Bank     Total  
2021 (April – September 2021)   $ 3,777     $ 39,746        
2022 (October 2021 – March 2022)     3,832       10,460        
Total Current Portion   $ 7,609     $ 50,206     $ 57,815  

 

2022 (April – September 2022)   $ 3,888     $ 12,548        
2023     7,947       -        
2024     4,748       -        
2025     -       -        
Total LT Portion   $ 16,583     $ 12,548     $ 29,131  
Grand Total   $ 24,192     $ 62,754     $ 86,946  

 

Revenue Recognition

 

We determine revenue recognition through the following steps in accordance with FASB Accounting Standards Update No. 2014-09 (Topic 606) “Revenue from Contracts with Customers”, which we adopted as of October 1, 2018 on a modified retrospective basis:

 

  ● identification of the contract, or contracts, with a customer;
  ● identification of the performance obligations in the contract;
  ● determination of the transaction price;
  ● allocation of the transaction price to the performance obligations in the contract; and
  ● recognition of revenue when, or as, we satisfy a performance obligation.

 

Revenue is recognized when control of the promised goods or services are transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. The adoption of Topic 606 did not have a material impact on our consolidated financial statements.

 

  12  

 

 

Foreign Currency Translation

 

The financial position and results of operations of each of the Company’s foreign subsidiaries are measured using the foreign subsidiary’s local currency as the functional currency. Revenues and expenses of each such subsidiary have been translated into U.S. dollars at average exchange rates prevailing during the period. Assets and liabilities have been translated at the rates of exchange on the balance sheet date. The resulting translation gain and loss adjustments are recorded directly as a separate component of stockholders’ equity unless there is a sale or complete liquidation of the underlying foreign investment. Foreign currency translation adjustments comprising accumulated other comprehensive income (loss) amounted to $5,480 and $(69,719) for the six months ended March 31, 2021 and 2020, respectively.

 

Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the results of operations as incurred.

 

Inventories

 

Inventory, consisting principally of raw materials, work in process and finished goods held for production and sale, is stated at the lower of cost or net realizable value, cost being determined using the weighted average cost method. The Company reviews inventory levels at least quarterly and records a valuation allowance when appropriate. At March 31, 2021 and September 30, 2020, the carrying value of inventory of $241,291 and $245,370 respectively, reflected on the consolidated balance sheets is net of this adjustment.

 

    March 31, 2021     September 30, 2020  
Raw materials   $ 189,514     $ 176,231  
Finished goods     51,777       69,139  
Less – Inventory reserve     -       -  
Total   $ 241,291     $ 245,370  

 

Joint Venture

 

On January 9, 2020, a joint venture agreement was signed between Industrial Marino, S.A. de C.V. (50%) and NuZee, Inc. (50%) forming NuZee LATIN AMERICA (NLA), S.A. de C.V. NLA was formed pursuant to the laws of Mexico, with corporate domicile in Mazatlan, Mexico. As part of the capitalization of NLA, NuZee contributed two co-packing machines to the joint venture. These machines had an aggregate carrying cost of $313,012. NuZee received $110,000 in cash for this contribution and recorded an investment in NLA of $160,000 and a loss of $43,012 on the contribution of the machines to NLA.

 

The Company accounts for NLA using the equity method of accounting since the management of day to day operations at NLA ultimately lies with the Company’s joint venture partner as the operations of NLA are based in its partners facilities and our partner appoints the Chairman of the joint Board. As of March 31, 2021, the only activity in NLA was the contribution of two machines as described above and other start up related activities. $3,975 of a loss was recognized under the equity method of accounting during the six months ended March 31, 2021.

 

2. GEOGRAPHIC CONCENTRATION

 

The Company is organized in three geographical segments. The Company co-packs product for customers and produces and sells its products directly in North America and Korea. The Company has investor relations operations in Japan as a majority of our shareholders are based in Japan. In March of 2021, the Company wrote off $840,391 of assets in North America as these assets were deemed to be no longer useful for the current business operations. $105,825 of the impairment was related to the ROU asset and $734,566 was to property and equipment. This write off is included in operating expenses on our consolidated statement of operations for the three months and six months ended March 31, 2021. These assets are co-packing equipment that have limited capabilities compared with other equipment the Company is currently utilizing. Since we have yet to utilize this equipment since it was delivered, we have determined their usefulness to our future operations is limited. Information about the Company’s geographic operations are as follows:

 

  13  

 

 

Geographic Concentrations

 

  Six Months Ended     Six Months Ended  
    March 31, 2021     March 31, 2020  
Net Revenue:            
North America   $ 658,338     $ 636,687  
Japan     -       234,014  
South Korea     273,713       68,899  
    $ 932,051     $ 939,600  

 

Property and equipment, net:   As of
March 31, 2021 		    As of
September 30, 2020 		 
North America   $ 616,868     $ 1,422,575  
Japan     2,577       2,813  
South Korea     262,530       242,960  
    $ 881,975     $ 1,668,348  

 

3. RELATED PARTY TRANSACTIONS

 

For the six months ended March 31, 2021, we sold $15,998 of materials to NLA.

 

4. ISSUANCE OF EQUITY SECURITIES

 

During the six months ended March 31, 2021, the Company sold (i) 72,955 shares of common stock to Triton Funds LP in a registered public offering for aggregate net proceeds of $534,494 pursuant to a Common Stock Purchase Agreement dated as of October 26, 2020 and a prospectus supplement to the Company’s effective shelf registration statement on Form S-3 (Registration No. 333-248531), and (ii) 256,338 shares of common stock at $9.14 per share for aggregate net proceeds of $2,149,486 pursuant to Securities Act registration exemptions under Regulation S and/or Section 4(a)(2) of the Securities Act. In addition, as further described below, during the six months ended March 31, 2021, the Company sold pursuant to an Underwriting Agreement dated as of March 19, 2021 and a prospectus supplement to the Company’s effective shelf registration statement on Form S-3 (Registration No. 333-248531) (i) 2,777,777 units (“Units”) in an underwritten registered public offering for aggregate net proceeds of $11,017,304 which includes the proceeds from the underwriter’s full exercise of their overallotment option with respect to the warrant component of the Units, as further described below, with each Unit consisting of (a) one share of our common stock, (b) one Series A warrant (each, a “Series A Warrant” and collectively, the “Series A Warrants”) to purchase one share of our common stock with an initial exercise price of $4.50 per whole share, and (c) one Series B warrant (each, a “Series B Warrant” and collectively, the “Series B Warrants” and together with the Series A Warrants, the “Warrants”) to purchase one-half share of our common stock with an initial exercise price of $5.85 per whole share, and (ii) 416,666 Series A Warrants and 416,666 Series B Warrants, each pursuant to the underwriter’s full exercise of their overallotment option with respect to such warrants. During the six months ended March 31, 2021, 6,000 shares were issued upon the exercise of stock options. As part of this exercise, the Company received $9,180 in proceeds.

 

On January 11, 2021, the Compensation Committee (the “Committee”) of the Company’s Board of Directors granted to Shanoop Kothari, the Company’s Chief Financial Officer, in connection with the Committee’s determination of Mr. Kothari’s annual compensation, an award of 152,215 restricted shares (the “Restricted Shares”) of the Company’s common stock under the NuZee, Inc. 2019 Stock Incentive Plan. The Restricted Shares vest as follows: (i) 50,739 Restricted Shares vested immediately (35,739 net shares were issued to Mr. Kothari following the forfeiture of 15,000 vested shares to cover taxes); (ii) 50,739 Restricted Shares will vest on March 31, 2021; and (iii) 50,737 Restricted Shares vest on March 31, 2022.

 

On March 11, 2021, we terminated our At Market Issuance Sales Agreement, dated September 1, 2020 (the “ATM Agreement”), with B. Riley Securities, Inc. (f/k/a/ B. Riley FBR, Inc.) and The Benchmark Company, LLC (collectively, the “Agents”), pursuant to which we could from time to time offer and sell up to an aggregate of $50.0 million of shares of our common stock through the Agents in “at-the-market-offerings”, as defined in Rule 415 under the Securities Act of 1933, as amended (the “Securities Act”). We did not sell any shares of common stock under the ATM Agreement. The Company’s consolidated statement of cash flows for the six months ended March 31, 2021 includes stock issuance expenses of $477,605 in connection with the terminated ATM Agreement.

 

  14  

 

 

5. STOCK OPTIONS AND WARRANTS

 

Options

 

During the six months ended March 31, 2021, the Company issued 15,000 options to independent contractors and 1,141,615 options to independent Board members. The right to exercise these options shall vest and become exercisable over a period of 3 years for independent contractors and for independent board members, 1/3 of options vested immediately with the balance over a period of 2 years. The exercise price ranged from $5.10 - $16.79 per share. The options will expire ten years from the grant date, unless terminated earlier as provided by the option agreements.

 

The fair value of each option award was estimated on the date of grant using the Black-Scholes option valuation model using the assumptions noted as follows: expected volatility was based on the Company’s historical stock performance. The expected term of options granted was determined using the contractual term. The risk-free rate is calculated using the U.S. Treasury yield curve and is based on the expected term of the option.

 

The Black-Scholes option pricing model was used with the following weighted average assumptions for options granted during the six months ended March 31, 2021:

 

For non-employees and independent Board members   March 31, 2021  
Risk-free interest rate     0.81 – 1.56 %
Expected option life     10 years  
Expected volatility     303 - 311 %
Expected dividend yield     0.00 %
Exercise price   $ 5.10 - $16.79  

 

For the six months ended March 31, 2021, 167,495 options were forfeited because of the termination of employment and conclusion of Board appointment. For the six months ended March 31, 2021, 6,000 shares were issued upon the exercise of stock options.

 

The following table summarizes stock option activity for six months ended March 31, 2021:

 

   

Number of

Shares

   

Weighted Average

Exercise

Price

   

Weighted

Average

Remaining

Contractual Life (years)

   

Aggregate

Intrinsic Value

 
Outstanding at September 30, 2020     1,620,667     $ 5.74       7.3     $ 19,112,118  
Granted     1,156,615       8.24                  
Exercised     (6,000 )     1.53                  
Expired     -       -                  
Forfeited     (167,495 )     13.49                  
Outstanding at March 31, 2021     2,603,787     $ 6.06       8.0     $ 1,606,693  
                                 
Exercisable at March 31, 2021     1,386,726     $ 6.50       8.0     $ 953,361  

 

The Company is expensing these stock option awards on a straight-line basis over the requisite service period. The Company recognized stock option expenses of $6,496,304 for the six months ended March 31, 2021. Unamortized option expense as of March 31, 2021, for all options outstanding amounted to $5,257,928. These costs are expected to be recognized over a weighted- average period of 1.4 years. The Company recognized stock option expenses of $3,183,351 for the six months ended March 31, 2020.

 

A summary of the status of the Company’s nonvested options as of March 31, 2021, is presented below:

 

Nonvested options

 

    Number of nonvested shares     Weighted average grant date fair value  
Nonvested shares at September 30, 2020     762,917     $ 10.60  
Granted     1,156,615       8.24  
Forfeited     (131,662 )     11.85  
Vested     (570,809 )     8.13  
Nonvested shares at March 31, 2021     1,217,061       9.38  

 

15

 

 

Warrants

 

On June 23, 2020, as part of our agreement with Benchmark Company, LLC the underwriter of the Company’s June 2020 registered public offering of common stock, we issued 40,250 warrants to purchase our common stock at an exercise price of $9.00 a share. These warrants are exercisable on December 23, 2020 and expire on June 18, 2025.

 

On March 19, 2021, we entered into an underwriting agreement in connection with our registered public offering (the “Offering”) of (i) 2,777,777 units (the “Units”), at a price to the public of $4.50 per Unit, with each Unit consisting of (a) one share of our common stock, (b) one Series A Warrant, and (c) one Series B Warrant, and (ii) 416,666 Series A Warrants and 416,666 Series B Warrants, each pursuant to the underwriter’s full exercise of their overallotment option with respect to such warrants.

 

Each Series A Warrant entitles the registered holder to purchase one share of our common stock at an exercise price of $4.50 per share. Each Series B Warrant entitles the registered holder thereof to purchase one-half of a share of our common stock at an exercise price of $5.85 per whole share. These warrants have a term of 5 years.

 

The following table summarizes warrant activity for the six months ended March 31, 2021:

 

   

Number of

Shares

Issuable

Upon

Exercise of

Warrants

   

Weighted Average

Exercise

Price

   

Weighted

Average

Remaining

Contractual Life (years)

   

Aggregate

Intrinsic Value

 
Outstanding at September 30, 2020     40,250     $ 9.00       4.7     $ 321,598  
Issued     4,791,665       4.95       5.0       -  
Exercised     -       -                  
Expired     -       -                  
                                 
Outstanding March 31, 2021     4,831,915     $ 4.98       5.0       -  
                                 
Exercisable at March 31, 2021     4,831,915     $ 4.98       5.0     $ -  

 

6. SUBSEQUENT EVENT

 

On April 22, 2021, the Compensation Committee (the “Committee”) of the Company’s Board of Directors granted to Tracy Ging, in connection with the appointment of Ms. Ging to the Board, an award of options to purchase 228,323 shares of our common stock at an exercise price of $3.03. Fifty percent of the options (114,162) vested on April 22, 2021. The remainder of the options vest in installments of 57,081 on April 22, 2022 and 57,080 on April 22, 2023.

 

On May 3, 2021, the Committee granted to Tomoko Toyota, in connection with the appointment of Ms. Toyota as the Company’s new Chief Marketing Officer, awards of (i) options to purchase 30,000 shares of our common stock at an exercise price of $3.13, which vest as to one third on each anniversary of the grant date, and (ii) options to purchase 120,000 shares of our common stock at an exercise price of $3.13, which vest over a three year period commencing October 1, 2021 based on the Company’s achievement of various performance targets tied to adjusted gross sales in each of fiscal year 2022, fiscal year 2023 and fiscal year 2024.

 

On May 10, 2021, the Committee granted to Jose Ramirez, in connection with the appointment of Mr. Ramirez as the Company’s new Chief Sales Officer and Chief Supply Chain Officer, awards of (i) options to purchase 30,000 shares of our common stock at an exercise price of $2.91, which vest as to one third on each anniversary of the grant date, and (ii) options to purchase 150,000 shares of our common stock at an exercise price of $2.91, which vest over a three year period commencing on May 10, 2021 based on the Company’s achievement of various performance targets tied to adjusted gross sales in the period from May 10, 2021 through September 30, 2021 and each of fiscal year 2022, fiscal year 2023 and fiscal year 2024.

 

16

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

Overview

 

We are a specialty coffee company and, we believe, the leading single serve pour over coffee co-packer in the United States. Our mission is to leverage our position as a co-packer at the forefront of the North American single serve pour over coffee market to revolutionize the way single serve coffee is enjoyed in the United States. While the United States is our core market, we also have manufacturing and sales operations in Korea and a joint venture in Latin America.

 

We believe we are the only commercial-scale producer of single serve pour over coffee products within the North American market. We intend to leverage our position to be the commercial manufacturer of choice for major companies seeking to enter the single serve pour over coffee market in North America. We target existing, high-margin companies and are paid per-package based on the number of single serve pour over coffee products produced by us. Accordingly, we consider our business model to be a form of tolling arrangement, as we receive a fee for almost every single serve pour over coffee product our co-packing customers sell in the North American market. While we financially benefit from the success of our manufacturing customers through the sales of their respective single serve pour over coffee products, we are also able to avoid the risks associated with owning and managing the product and its related inventory.

 

Our primary focus is the development of single serve pour over coffee in the North American market targeting the individual consumer for use at home and office or other settings that would benefit from single serve pour over products, and positioning ourselves as the leading commercial-scale co-packer of single serve pour over coffee products. We may also consider co-packaging other products that are complementary to single serve pour over drip coffee and provide us with a deeper access to our customers, such as tea bag coffee. In addition, we are continually exploring potential strategic partnerships, co-ventures, and mergers, acquisitions, or other transactions with existing and future business partners to generate additional business, reduce manufacturing costs, expand into new markets, and further penetrate the markets in which we currently operate.

 

Since 2016, we have been primarily focused on single serve pour over coffee production. Over this time we have developed expertise in the operation of our sophisticated packing equipment and the related production of the single serve pour over product at both our Vista, California facility and at our production operations in Korea. We plan to carry over this expertise to our Plano, Texas manufacturing facility, which serves as our new single serve pour over co-packing hub and corporate headquarters to capture the location’s logistical advantages and lower cost structure. We have co-packing and commercial arrangements pursuant to which we plan to manufacture coffee blended with water-soluble THC-free cannabidiol (“CBD”) isolate powder. We intend to offer both THC-free CBD isolate powder and THC-free broad-spectrum options pursuant to the agreements and to other CBD brands and co-packing customers. We intend to segregate the products containing CBD from conventional coffee for production and packing on separate product machines.

 

In November 2020, we announced a strategic partnership with Farmer Brothers Co. (“FBC”) pursuant to which we may (but are not required to) place up to 50 co-packing machines in Farmer Brothers SQF-certified facility in Northlake, Texas. FBC intends to use the co-packing machines for the exclusive purpose of manufacturing certain of our products for us, our customers and certain of FBC’s customers. By pairing Farmer Brothers manufacturing and distribution capability with NuZee’s technical expertise and products with historic demand in Asia, the partnership is expected to accelerate the scale-up in the U.S. and efficient delivery of our products to coffee companies and branded businesses.

 

Impact of the COVID-19 Pandemic

 

The ongoing COVID-19 global and national health emergency has caused significant disruption in the international and United States economies and financial markets. In the six months ended March 31, 2021, as a result of the COVID-19 pandemic and responses to the outbreak, certain of our customers slowed or delayed purchases of our co-packing services or pour over coffee products, and we also believe that potential sales of our pour over coffee products to new or potential customers in the hospitality industry were adversely impacted. In addition, we have experienced delays in the submission and approval of custom artwork and packaging as well as the shipment to us of coffee for co-packing. We do not believe, however, that these delays had a significant effect on our business or results of operations to date. The COVID-19 crisis may have an adverse impact on our business and financial results going forward that we are not currently able to fully determine or quantify. The COVID-19 crisis may adversely affect the ability of our customers to pay for goods delivered on a timely basis, or at all. Any increase in the amount or deterioration in the collectability of accounts receivable will adversely affect our cash flows and results of operations, requiring an increased level of working capital.

 

Geographic Concentration

 

Our operations are primarily split between two geographic areas: North America and Asia.

 

17

 

 

For the three months ended March 31, 2021, net revenues attributable to our operations in North America totaled $251,850 compared to $256,101 of net revenues attributable to our operations in North America for the three months ended March 31, 2020. For the six months ended March 31, 2021, net revenues attributable to our operations in North America totaled $658,338 compared to $636,687 of net revenues attributable to our operations in North America for the six months ended March 31, 2020. Additionally, as of March 31, 2021, $616,868 of our Property and equipment, net was attributable to our North American operations, compared to $1,422,575 attributable to our North American operations as of September 30, 2020. In March 2021, the Company wrote off $840,391 of assets in North America as these assets were deemed to be no longer useful for the current business operations. $105,825 of the impairment was related to the ROU asset and $734,566 was to property and equipment. This write off is included in operating expenses on our consolidated statement of operations for the three months ended March 31, 2021. These assets are co-packing equipment that have limited capabilities compared with other equipment the Company is currently utilizing. Since we have yet to utilize this equipment since it was delivered, we have determined their usefulness to our future operations is limited.

 

For the three months ended March 31, 2021, net revenues attributable to our operations in Asia totaled $162,214 compared to $137,291 of net revenues attributable to our operations in Asia during the three months ended March 31, 2020. For the six months ended March 31, 2021, net revenues attributable to our operations in Asia totaled $273,714 compared to $302,913 of net revenues attributable to our operations in Asia during the three months ended March 31, 2020. Additionally, as of March 31, 2021, $265,107 of our Property and equipment, net was attributable to our Asian operations, compared to $245,773 attributable to our Asian operations as of September 30, 2020.

 

Results of Operations

 

Comparison of three months ended March 31, 2021 and 2020:

 

Revenue

 

    Three months ended        
    March 31,     Change  
    2021     2020     Dollars     %  
Revenue   $ 414,064     $ 393,392     $ 20,672       5 %

 

For the three months ended March 31, 2021, our revenue increased by $20,672, or approximately 5%, compared with the three months ended March 31, 2020. This increase was primarily related to increased co-packing revenue partially offset by the impact from the sale of NuZee JP to Eguchi Holdings Co., Ltd. (“EHCL”) on September 28, 2020 as the results for the three months ended March 31, 2020 include revenues from NuZee JP while the results for the three months ended March 31, 2021 do not.

 

Cost of sales and gross margin

 

    Three months ended              
    March 31,     Change  
    2021     2020     Dollars     %  
Cost of sales   $ 423,113     $ 496,692     $ (73,579 )   (15 )%
Gross profit   $ (9,049 )   $ (103,300 )   $ 94,251     (91 )%
Gross profit %   (2 )%   (26 )%                

 

For the three months ended March 31, 2021, we incurred a total gross loss of ($9,049), from sales of our products and co-packing services, compared to a total gross loss of ($103,300) for the three months ended March 31, 2020. The gross margin rate was (2)% for the three months ended March 31, 2021, and (26%) for the three months ended March 31, 2020. This increase in margin was driven primarily by increased efficiencies resulting from additional experience in co-packing during the current year period compared to the prior year period. In the three months ended March 31, 2020, the Company incurred increased costs as it continued to scale up its co-packing operations as well as a loss incurred on the close-out of certain inventory items for a particular customer.

 

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Operating Expenses

 

    Three months ended        
    March 31,     Change  
    2021     2020     Dollars     %  
Revenue   $ 6,111,759     $ 2,413,632     $ 3,698,127       153 %

 

For the three months ended March 31, 2021, the Company’s operating expenses totaled $6,111,759 compared to $2,413,632 for the three months ended March 31, 2020, representing a 153% increase. This increase is primarily attributable to an increase in stock-based compensation expense, the impairment of certain property and equipment as well as increased operating expenses associated with greater staffing levels.

 

Net Loss

 

    Three months ended        
    March 31,     Change  
    2021     2020     Dollars     %  
Net Loss attributable to NuZee, Inc.   $ 6,085,608     $ 2,490,251     $ 3,595,357       144 %

 

For the three months ended March 31, 2021, we generated net losses attributable to NuZee, Inc. of $6,085,608 versus $2,490,251 for the three months ended March 31, 2020. This increase in net losses is primarily attributable to higher stock compensation expense and operating expenses.

 

Comparison of six months ended March 31, 2021 and 2020:

 

Revenue

    Six months ended        
    March 31,     Change  
    2021     2020     Dollars     %  
Revenue.   $ 932,051     $ 939,600     $ (7,549 )   (1 )%

 

For the six months ended March 31, 2021, our revenue decreased by $7,549, or approximately 1%, compared with the six months ended March 31, 2020. This decrease was primarily related to the impact from the sale of NuZee JP to EHCL on September 28, 2020, as the results for the six months ended March 31, 2020 include revenues from NuZee JP while the results for the six months ended March 31, 2021 do not. Such decrease was partially offset by increased co-packing revenues.

 

Cost of sales and gross margin

 

    Six months ended              
    March 31,     Change  
    2021     2020     Dollars     %  
Cost of sales   $ 939,397     $ 919,865     $ 19,532       2 %
Gross profit   $ (7,346 )   $ 19,735     $ (27,081 )   (137 )%
Gross profit %   (1 )%     2 %                

 

For the six months ended March 31, 2021, we incurred a total gross loss of ($7,346), from sales of our products and co-packing services, compared to a total gross profit of $19,735 for the six months ended March 31, 2020. The gross margin rate was (1)% for the six months ended March 31, 2021, and 2% for the six months ended March 31, 2020. This decrease in margin was driven by the customer mix in the current period versus the prior period last year.

 

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Operating Expenses

 

    Six months ended        
    March 31,     Change  
    2021     2020     Dollars     %  
Operating Expenses.   $ 12,015,585     $ 5,963,465     $ 6,052,120       101 %

 

For the six months ended March 31, 2021, the Company’s operating expenses totaled $12,015,585 compared to $5,963,465 for the six months ended March 31, 2020, representing a 101% increase. This increase is primarily attributable to an increase in stock-based compensation expense as well as increased operating expenses associated with greater staffing levels.

 

Net Loss

 

    Six months ended        
    March 31,     Change  
    2021     2020     Dollars     %  
Net Loss attributable to NuZee, Inc.   $ 11,981,680     $ 5,911,483     $ 6,070,197       103 %

 

For the six months ended March 31, 2021, we generated net losses attributable to NuZee, Inc. of $11,981,680 versus $5,911,483 for the six months ended March 31, 2020. This increase in net losses is primarily attributable to higher stock compensation expense and operating expenses.

 

Liquidity and Capital Resources

 

Since our inception in 2011, we have incurred significant losses, and as of March 31, 2021, we had an accumulated deficit of approximately $46 million. We have not yet achieved profitability, and anticipate that we will continue to incur significant sales and marketing expenses prior to recording sufficient revenue from our operations to offset these expenses. We expect to incur additional losses as a result of the costs associated with operating as an exchange-listed public company in the future. To date, we have funded our operations primarily with proceeds from equity offerings.

 

Our principal use of cash is to fund our operations, which includes the commercialization of our pour over coffee products, the continuation of efforts to improve our products, administrative support of our operations and other working capital requirements.

 

We may need to raise additional funds to support our operating activities, and such funding may not be available to us on acceptable terms, or at all. If we are unable to raise additional funds when needed, our operations and ability to execute our business strategy could be adversely affected. We may seek to raise additional funds through equity, equity-linked or debt financings. If we raise additional funds through the incurrence of indebtedness, such indebtedness would have rights that are senior to holders of our equity securities and could contain covenants that restrict our operations. Any additional equity financing may be dilutive to our stockholders.

 

As of March 31, 2021, we had a cash balance of $15,035,026.

 

Summary of Cash Flows

 

    Six months ended  
    March 31,  
    2021     2020  
Cash used in operating activities   $ (2,920,481 )   $ (2,235,752 )
Cash used in investing activities   $ (122,554 )   $ (419,860 )
Cash provided by financing activities   $ 13,674,036     $ 1,942,070  
Effect of foreign exchange on cash   $ 5,480     $ 11,119  
Net increase (decrease) in cash   $ 10,636,481     $ (702,423 )

 

Operating Activities

 

We used $2,920,481 and $2,235,752 of cash in operating activities during the six months ended March 31, 2021 and 2020, respectively, principally to fund our operating loss. Excluding the impact of stock compensation expense, the cash used in operating activities was $4,614,376 during the current fiscal year period versus $2,770,122 in the six months in the prior fiscal year. This increase was primarily attributable to the increase in operating expenses associated with greater staffing levels and professional services expenses over the current fiscal year period.

 

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Investing Activities

 

We used $122,554 of cash versus used $419,860 of cash in investing activities during the six months ended March 31, 2021 and 2020, respectively, principally to fund the purchase of equipment.

 

Financing Activities

 

Historically, we have funded our operations primarily through the issuance of our common stock.

 

Cash provided by financing activities increased to $13,674,036 for the six months ended March 31, 2021 from $1,942,070 for the six months ended March 31, 2020. The increase in cash provided by financing activities is primarily related to the increase in proceeds from the issuance of equity securities.

 

Termination of ATM Agreement

 

On March 11, 2021, we terminated our At Market Issuance Sales Agreement, dated September 1, 2020 (the “ATM Agreement”), with B. Riley Securities, Inc. (f/k/a/ B. Riley FBR, Inc.) and The Benchmark Company, LLC (collectively, the “Agents”), pursuant to which we could from time to time offer and sell up to an aggregate of $50.0 million of shares of our common stock through the Agents in “at-the-market-offerings”, as defined in Rule 415 under the Securities Act of 1933, as amended (the “Securities Act”). We did not sell any shares of common stock under the ATM Agreement.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

 

We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information under this item.

 

Item 4. Controls and Procedures

 

Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our periodic reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, and that such information is collected and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Our Chief Executive Officer and Chief Financial Officer are responsible for establishing and maintaining disclosure controls and procedures for our Company. In designing and evaluating our disclosure controls and procedures, management recognizes that no matter how well conceived and operated, disclosure controls and procedures can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met.

 

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, carried out an evaluation of the effectiveness of our “disclosure controls and procedures” (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this Quarterly Report on Form 10-Q (the “Evaluation Date”). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the Evaluation Date, our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act (i) is recorded, processed, summarized and reported, within the time periods specified in the SEC rules and forms and (ii) is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures.

 

Changes in Internal Control Over Financial Reporting

 

There were no changes in our internal control over financial reporting during the three-month period ended March 31, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II.

 

Item 1. Legal Proceedings

 

From time to time, we may be subject to legal proceedings and claims in the ordinary course of business. The results of any future litigation cannot be predicted with certainty, and regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources, and other factors.

 

Item 1A. Risk Factors

 

Except as set forth below, there have been no changes to our risk factors from those disclosed in our Annual Report on Form 10-K filed with the SEC on December 28, 2020.

 

Our CBD strategy may not develop as planned due to business and regulatory factors.

 

We have co-packing and commercial arrangements pursuant to which we plan to manufacture coffee blended with water-soluble THC-free CBD isolate powder. We intend to offer both THC-free CBD isolate powder and THC-free broad-spectrum options pursuant to the agreement and to other CBD brands and co-packing customers. Our business strategy pertaining to our CBD-blended coffee products may not develop as planned due to many business and regulatory factors. For example, many companies are entering the CBD space and we expect that the competition for market share and acceptance of new products will be significant.

 

Our planned CBD coffee product line is subject to varying, rapidly changing federal, state, and local laws, regulations, and rules, which could adversely affect our results of operations and financial condition. In addition, the FDA currently asserts that CBD is not a lawful ingredient in foods and dietary supplements, which could subject certain of our operations to regulatory enforcement.

 

As discussed above, we plan to manufacture coffee blended with water-soluble THC-free CBD isolate powder. Products that contain CBD are subject to various state and federal laws regarding the production and sale of hemp-based products. Historically, the U.S. Drug Enforcement Administration (“DEA”) considered CBD to be a Schedule I controlled substance subject to the Controlled Substances Act (“CSA”) under the definition for “marijuana.” However, the Agriculture Improvement Act of 2018 (the “2018 Farm Bill”) removed “hemp” from the definition of “marijuana” in the CSA. “Hemp” is defined as the plant Cannabis sativa L. and any part of that plant, including the seeds thereof and all derivatives, extracts, cannabinoids, isomers, acids, salts, and salts of isomers, whether growing or not, with a delta-9 tetrahydrocannabinol (“THC”) concentration of not more than 0.3 percent on a dry weight basis. As a result of the enactment of the 2018 Farm Bill, the CBD used in our coffee products will not be a Schedule 1 controlled substance if the Farm Bill conditions are satisfied (THC limit, for example). However, there is a risk that we could be subject to DEA enforcement action, including prosecution, if any of our coffee products are found to contain non FARM Bill compliant CBD.

 

In addition, although hemp and hemp-derived CBD are no longer controlled substances subject to regulation under the CSA, the FDA has stated that it is nonetheless unlawful under the Federal Food, Drug, and Cosmetic Act (“FDCA”) to market foods or dietary supplements containing CBD. Specifically, the FDCA prohibits the introduction or delivery for introduction into interstate commerce of any food or dietary supplement that contains an approved drug or a drug for which substantial clinical investigations have been instituted and made public, unless a statutory exemption applies. The FDA has stated its conclusion that this statutory prohibition applies and none of the exceptions has been met for CBD. Nevertheless, there are hundreds of CBD-containing foods and dietary supplements on the market. FDA has limited its enforcement actions to those products that bear disease/therapeutic claims.

 

The FDA has held public meetings and formed an internal working group to evaluate the potential pathways to market for CBD products, which could include seeking statutory changes from Congress or promulgating new regulations. If legislative action is necessary, such legislative changes could take years to finalize and may not include provisions that would enable us to produce, market and/or sell our CBD-blended coffee products, and FDA could similarly take years to promulgate new regulations. Additionally, while the agency’s enforcement focus to date has primarily been on CBD products that are associated with therapeutic claims, the agency has recently issued warning letters to companies marketing CBD products without such claims, and there is a risk that FDA could take enforcement action against our coffee products, our third-party supplier of THC-free CBD isolate powder, or those marketing similar products, which could limit or prevent us from marketing CBD-blended coffee products. While the FDA announced on March 5, 2020, that it is currently evaluating a risk-based enforcement policy for CBD to provide more clarity to industry and the public while the agency takes potential steps to establish a clear regulatory pathway, it remains unclear whether or when FDA will ultimately issue such an enforcement policy.

 

Moreover, local, state, federal, and international CBD, hemp and cannabis laws and regulations are rapidly changing and subject to evolving interpretations, which could require us to incur substantial costs associated with compliance requirements or alteration of certain aspects of our CBD coffee business plan or activities in the event that our CBD-blended coffee products become subject to new restrictions, including limitation of marketing and promotion, or potential removal from the market altogether. In addition, if a regulatory authority determines, or if litigators such as class action lawyers allege, that we have not complied with the applicable regulatory requirements, our business, financial condition and results of operations may be materially adversely impacted, and we or our customers could be subject to enforcement actions or loss of business.

 

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We cannot predict the nature of any future laws, regulations, interpretations, or applications, nor can we determine what effect additional governmental regulations or administrative policies and procedures, when and if promulgated, could have on our activities in the hemp and CBD industry. The constant evolution of laws and regulations may require us to incur substantial costs associated with legal and compliance fees and ultimately require us to alter our current business plan.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

During the three months ended March 31, 2021, the Company withheld shares of Company common stock to satisfy employee minimum statutory tax withholding obligations payable upon the vesting of restricted stock pursuant to the terms of the applicable restricted stock award agreements, as follows:

 

Period   Total Number of Shares Purchased    

Average Price

Paid per Share

   

Total Number of Shares Purchased

as Part of Publicly Announced Plans

or Programs

   

Maximum Number

of Shares that

May Yet Be Purchased Under

the Plans

or Programs

 
January 1 – January 31     15,000     $ 9.12       —       —  
February 1 – February 28     —       —       —       —  
March 1 – March 31     —           —           —            —  
Total     15,000                          

 

Item 6. Exhibits

 

EXHIBIT NO.   DESCRIPTION
10.1   Form of Restricted Stock Award Agreement under the NuZee, Inc. 2019 Stock Incentive Plan (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on January 15, 2021, SEC File Number 001-39338) 
     
10.2*   Form of Indemnification Agreement 
     
31.1*   Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
     
31.2*   Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
     
32.1**   Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
     
32.2**   Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
     
101***   Interactive Data Files
101.INS   XBRL Instance Document
101.SCH   XBRL Taxonomy Extension Schema Document
101.CAL   XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF   XBRL Taxonomy Extension Definition Linkbase Document
101.LAB   XBRL Taxonomy Extension Label Linkbase Document
101.PRE   XBRL Taxonomy Extension Presentation Linkbase Document

 

* Filed herewith.

 

** Furnished herewith.

 

*** Furnished herewith. Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of any registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, and otherwise are not subject to liability under those sections.

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

Date: May 17, 2021     NUZEE, INC.
         
      By: /s/ Masateru Higashida
        Masateru Higashida, Chief Executive Officer and President (Principal Executive Officer), Secretary, Treasurer, and Director
         
      By: /s/ Shanoop Kothari
        Shanoop Kothari, Chief Financial Officer
       

(Principal

Financial Officer and Principal

Accounting Officer)

 

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